If you run a startup, in the beginning, things will be tight. You may dream of all the things you could do with just a little more cash. While small business loans are great in the right situations, there are specific instances where they can be more of a drawback.
If any of these are reasons you’d give for wanting to take out a loan, I encourage you to tighten your belt and find other ways to grow your business.
1. You Can’t Pay Your Bills
Seems like a good reason to take out a loan, right? But when you’re strapped for cash, with no knowledge of when money will begin to flow in, taking out a loan is like trying to fill a big hole with water…with a spoon. You may get the funds to pay what’s due now, but what happens next month? And the month after that?
A Better Alternative: If you know you have invoices due and expect the money to come in soon, consider taking out a factoring loan against pending invoices. This is a quick, short-term fix when you have money coming in soon, but need to cover expenses now.
2. You Need Money for Personal Expenses
New business funding is designed to help you grow your business, not pay your cable bill. The idea is that if you take out a loan, you can use that money to invest in areas of your business that will help you recuperate that expense.
When you pay your personal expenses, you do nothing for your business, and you might, in fact, put it in jeopardy.
A Better Alternative: Now is the time to exercise prudence when it comes to your personal expenses. Cut down on expenses where you can, like pulling the plug on that cable account or switching cell phone companies for a better deal.
3. You Were Pre-Approved
Sorry to burst your bubble, but lots of people get those junk mail flyers saying “you’re pre-approved for a $100,000 loan!” It may make you feel warm and fuzzy that you were specially chosen for this unique opportunity, but you’ll find that these loan offers usually have terrible interest rates and high fees.
A Better Alternative: If you do decide to take out a small business loan, start with the bank you do business with the most, as well as other reputable SBA-backed loan programs.
Final Words on Taking Out a Business Loan
As I said, there are plenty of reasons to take out a small business loan. The important thing is to realize that you need a plan to pay it back. Even if you get a 10-year loan, plan to set aside money each month to pay toward your balance.
Before you apply for a loan, understand what you want it for, and what specifically you will use the funds for to grow your business. Only take out as much as you need to achieve that goal, with a small buffer.
Whether or not you decide to take out a business loan, always be smart with your money. CorpNet’s incorporation services are affordable and professional. Talk to one of our small business experts today about incorporating your business.